Thomas v. Magnachip Semiconductor Corp.

• Decision Date: 04 March 2016
• Docket Number: Case No. 14-cv-01160-JST
• Citation: 167 F.Supp.3d 1029
• Parties: Keith Thomas, et al., Plaintiffs, v. Magnachip Semiconductor Corp., et al., Defendants.
• Court: U.S. District Court — Northern District of California

167 F.Supp.3d 1029

Keith Thomas, et al., Plaintiffs,

v.Magnachip Semiconductor Corp., et al., Defendants.

Case No. 14-cv-01160-JST

United States District Court, N.D. California.

Signed March 4, 2016

Jeremy A. Lieberman, Marc Ian Gross, Michael J. Wernke, Pomerantz LLP, Francis P. McConville, Labaton Sucharow LLP, Phillip C. Kim, The Rosen Law Firm, P.A., New York, NY, Lionel Z. Glancy, Lesley F. Portnoy, Robert Vincent Prongay, Glancy Prongay & Murray LLP, Laurence M. Rosen, The Rosen Law Firm, P.A., Los Angeles, CA, Joshua B. Silverman, Patrick V. Dahlstrom, Pomerantz LLP, Chicago, IL, Michael M. Goldberg, Goldberg Law PC, Marina Del Rey, CA, Sunny September Sarkis, Robbins Geller Rudman & Dowd LLP, San Francisco, CA, for Plaintiffs.

Daniel J. Kramer, Robert N. Kravitz, Jacqueline P. Rubin, Meredith A. Arfa, Paul Weiss Rifkind Wharton & Garrison LLP, Kimberly Perrotta Cole, Michael Sangyun Kim, Kobre & Kim LLP, Daniel J. Fetterman, Brian Choi, Trevor Joseph Welch, Kasowitz, Benson, Torres & Friedman LLP, Douglas Maynard, John C. Murphy, Michael Asaro, Stephen Michael Baldini, Steven F. Reich, Sydney Spector, Akin Gump Strauss Hauer & Feld LLP, James E. Brandt, Jason C. Hegt, Latham & Watkins LLP, New York, NY, Alex Young K. Oh, Paul Weiss Rifkind Wharton & Garrison LLP, Washington, DC, John C. Tang, Kelsey Israel-Trummel, Jones Day, Evan N. Budaj, Michael Fang Peng, Kobre & Kim LLP, Jason Takenouchi, Kasowitz, Benson, Torres & Friedman LLP, Eric Ghiya Ruehe, Akin Gump Strauss Hauer & Feld LLP, San Francisco, CA, Christopher M. Egleson, Sidley Austin LLP, Los Angeles, CA, Matthew Rawlinson, Patrick Edward Gibbs, Latham & Watkins LLP, Menlo Park, CA, for Defendants.

ORDER GRANTING IN PART AND DENYING IN PART MOTIONS TO DISMISS

Re: ECF Nos. 121, 123, 126, 130, 155

JON S. TIGAR, United States District Judge

Before the Court are five motions to dismiss filed by Nader Tavakoli, ECF No. 121; by Avenue Capital Management II, L.P., Michael Elkins, and Randal Klein, ECF No. 123; by Ilbok Lee, Magnachip Semiconductor Corp., and R. Douglas Norby, ECF No. 126; by Barclays Capital Inc., Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Needham & Company, LLC, and UBS Securities LLC, ECF No. 130; and by Margaret Sakai, ECF No. 155. On December 11, 2015, the parties informed the Court that a settlement had been reached in regards to all claims asserted against all defendants except for Avenue Capital Management II, L.P. ECF No. 174. Accordingly, the motions to dismiss in regards to all other defendants are denied as moot.

For the reasons stated below, the motions to dismiss in regards to Avenue Capital Management II, L.P. are granted in part and denied in part. The parties have also filed five requests for judicial notice, ECF Nos. 125, 128, 132, 140, 157, which the Court will grant.

I. BACKGROUND

Plaintiffs in this case bring claims under both the Securities Exchange Act of 1934 (the “Exchange Act”) and the Securities Act of 1933 (“the Securities Act”), related to allegations that Magnachip made materially false and misleading statements in its financial statements and other information related to securities offerings. Magnachip announced in 2013 that it needed to restate many of its financial reports for the prior few years due to accounting errors, and later restated its financial results for the reporting periods during those years, in some instances reporting a loss rather than a profit. The claims were first brought in two separate cases that were later consolidated by this Court. See ECF No. 112.

A. Factual Background

For the purpose of this order, the following allegations in the Third Amended Complaint (“TAC”), ECF No. 114, are taken to be true.

Magnachip, a Delaware corporation with its principle place of business in Seoul, Korea, designs and manufactures “analog and mixed-signal semiconductor products” for a number of high volume consumer applications including smartphones, tablets, and PCs. TAC, ECF No. 114, at ¶¶ 23, 38. Magnachip began operations in 2004, but struggled and filed for Chapter 11 bankruptcy protection in 2009. Id. at ¶¶ 39-40. Following Magnachip's reorganization, Avenue Capital, a “global investment marketing firm” that “specializes in investing in high yield debt, debt of insolvent or financially distressed companies, and equity of companies undergoing financial or operational turnarounds or reorganizations,” was the majority owner of Magnachip by virtue of owning 70.3% of Magnachip's shares. Id. at ¶¶ 33, 40. Avenue Capital was entitled to have three designees serving as members of the seven-member board of directors, and, in exercising its power, appointed four out of the seven, three of which were Avenue employees and two of which served on the “Audit Committee” for the company. Id. at ¶ 41.

Magnachip eventually executed an IPO on March 10, 2011, at $14 per share. Id. at ¶ 41. Despite the “highly cyclical” nature of the semiconductor industry, Plaintiffs allege that Magnachip's reported results “curiously ‘managed’ to consistently beat analysts' consensus estimates,” which caused its stock price to “skyrocket” to $23.57 per share and “enabled Avenue Capital to sell over $310 million of its Magnachip shares.” Id. at ¶ 42.

MagnaChip also conducted a follow-on public stock offering on February 6, 2013 (the “2/13 Offering”). Id. at ¶ 1. On or about April 13, 2012, Magnachip filed Form S-3 Registration forms with the SEC using a “shelf” registration that would allow it to sell securities in continuing offerings. Id. at ¶ 112. For the February 6, 2013 offering, Magnachip's stock was priced at $14.50 per share, and Avenue Capital sold 5.75 million shares of common stock to the public. Id. at ¶113. Plaintiffs' Securities Act claims arise from stock purchases they made pursuant to this 2/13 Offering. Id. at ¶¶ 244, 254, 260.

Magnachip consistently reported positive results for each quarter from the beginning of 2011 through the third quarter of 2013. Id. at ¶¶ 44-90. On January 27, 2014, however, it “abruptly postponed its year-end and fourth quarter 2013 earnings release.” Id. at ¶ 92.

On March 11, 2014, Magnachip announced that its Audit Committee had determined that “Magnachip needed to restate its financial results for 2011 through 2013 due to improper revenue recognition for products sold through its distributors.” Id. at ¶ 94. It stated that this decision was “based on an ongoing review by ‘outside professional advisors,’ ” which had “identified ‘material weaknesses' in Magnachip's accounting procedures such that ‘internal controls over financial reporting and disclosure controls and procedures were not effective.’ ” Id. It also announced that Defendant Margaret Sakai had been “relieved” of her position as “principal accounting officer.” Id. Finally, “[w]hile stating that prior financial statements ‘should not be relied upon’, MagnaChip otherwise reassured investors that the accounting problem was one of simply timing of revenue recognition, rather than the absence of legitimate sales; and would be limited to distributor related transactions.” Id. Defendant Sang Park resigned in May 20, 2014 from his position as CEO of the company. Id. at ¶ 97.

On August 12, 2014, Magnachip announced that its financial statements would be “further delayed due to expansion of the investigation beyond ‘sales' to distributors to include issues of revenue recognition involving all customers; cost of goods sold; and inventory reserves.” Id. at ¶ 98. On November 12, 2014, Magnachip issued “preliminary findings” regarding the restatement identifying several “specific illegal accounting practices in violation of Generally Accepted Accounting Principles ('GAAP’)”. Id. at ¶ 99.

Magnachip issued its restatement of its financial results on February 12, 2015. Id. at ¶ 102. The restatement showed that Magnachip had overstated its earnings throughout 2011 to 2013—in the fiscal year 2011, for example, a reported net income of $21.8 million was restated to a loss of $11.3. Id. The following day, Magnachip's stock price was cut in half, from its previous price of $15.02 per share to $7.52 per share. Id. at ¶ 105. Over the next few days, Magnachip's share price continued to decline. Id. at ¶ 106.

B. Procedural Background

On March 12, 2014, the day after Magnachip first announced it would be issuing restatements of its financial reports, plaintiff Richard Hayes filed a class action complaint against Magnachip and multiple Magnachip officers. See Complaint, ECF No. 1. The complaint alleged claims under the Exchange Act. Id. On July 3, 2014, the Court appointed Keith Thomas (hereinafter, “Lead Plaintiff”) as Lead Plaintiff of the case. ECF No. 32.

On April 21, 2015, in a separate case, the Oklahoma Police Pension & Retirement System (“OPPRS”) filed a class action complaint against Magnachip, Avenue Capital, various officers at both companies, and several institutions serving as underwriters for Magnachip's transactions. See ECF No. 1, Case No. 3:15–cv–01797–JST. In addition to asserting the same claims as Lead Plaintiff, OPPRS also asserted claims for Securities Act violations. Id. On April 27, 2015, Magnachip moved to relate the two cases. ECF No. 74. Lead Plaintiff then filed a motion to consolidate the cases, though initially suggested cabining off OPPRS's Securities Act claims. ECF No. 78. OPPRS opposed the motion, ECF No. 86, while the Defendants argued for consolidating the cases in full, ECF No. 89, 91. On June 15, 2015, the Court consolidated the two cases in full. ECF No. 112.

The Plaintiffs filed their most recent complaint, the Third Amended Complaint, on June 26, 2015. ECF No. 114. The complaint brings claims under both the Exchange Act and the Securities Act. The defendants named in the complaint are Magnachip; three of Magnachip's current and former officers (Sang Park, Margaret Sakai, and Tae Young Hwang); two members of the Board of Directors and the Audit Committee who were also Avenue Capital employees (Randall Klein and ...